CORRESP 1 filename1.htm corresp
March 4, 2011
VIA FACSIMILE TRANSMISSION
Mr. Hugh West
Accounting Branch Chief
Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
  RE:   Reliance Bancshares, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2009
Filed March 26, 2010
File No. 00-52588
Dear Mr. West:
On behalf of Reliance Bancshares, Inc. (the “Company”), we are responding to the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) with respect to the above referenced filing, to further supplement our initial correspondence, as required by your letter of September 23, 2010 to the undersigned. Our responses are numbered to correspond with the numbered comments contained in the September 23, 2010 letter. For your convenience, we have repeated the Commission’s comments below before each of our responses.
Form 10-K for the Fiscal Year Ended December 31, 2009
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1. Business
Informal Regulatory Agreements, page 3
  1.   We note the disclosure regarding your memorandums of understanding (MOUs) with various regulators. To the extent that initiatives implemented to comply with the MOUs (or other agreements) are expected to have a material impact on your results of operations, financial position, or liquidity, please revise your future filings to disclose in detail the changes you have made or intend to make to comply with this guidance. Specifically, discuss any changes to your allowance for loan loss methodology and to quantify the impact of any methodology enhancements on the amounts recorded at March 31, 2010 and June 30, 2010 and clearly disclose how you evaluated the impact of the

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 2
      changes on your allowance as of December 31, 2009. Otherwise, confirm in your response that you believe the initiatives will not have a material impact on your future periods and would not have had a material impact had they been applied in past periods. Tell us how you assessed their materiality for these purposes.
      Company Response: Management does not believe that the MOUs and other agreements with the banking regulators have had, or will have, a material impact on the Company’s consolidated results of operations, financial position, or liquidity. Many of the items included in the various agreements are standard requirements for such agreements and have generally been issued when certain negative thresholds are reached – in this case, the Banks’ level of problem assets as a percentage of regulatory capital and a high concentration in commercial real estate lending of the Company’s two subsidiaries, Reliance Bank and Reliance Bank, FSB (the “Banks”).
      The regulatory agreements reaffirm that the Banks’ management continue with its present actions and initiatives which had already been in place, specifically, to:
  •   develop a plan to reduce criticized assets (the Banks have established plans to reduce their level of criticized assets on an on-going basis – once an asset is placed on the Banks’ watch lists, formal action plans are developed specifically for that asset);
 
  •   maintain the reserve for loan losses at a level which is reasonable in relation to the degree of risk inherent in the Banks’ loan portfolios (as discussed more fully below, the Banks’ reserve for loan losses calculations have been and will continue to be maintained at adequate levels in accordance with applicable regulatory guidelines and generally accepted accounting principles);
 
  •   develop and adopt policies and procedures designed to identify and monitor concentrations of credit (the Company has always had a high concentration of credit in the commercial real estate area, and has expanded its monitoring efforts in this area through increased loan review efforts and more frequent valuations of commercial real estate loan collateral);
 
  •   formulate plans to reduce the levels of concentrations of credit in the commercial real estate and land acquisition and development areas (the Company’s existing markets have largely dictated such actions, as the depressed markets have reduced the level of new loans made in these areas);

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 3
  •   review and revise the Banks’ formal loan policies (the Banks have continued to update their loan policies and procedures in reaction to a declining economic environment);
 
  •   cease making or extending any loans which might violate the Banks’ written loan policies (as noted above, the existing market conditions are not conducive to making many new loans. Any policy overrides have always required approval of the Board of Directors);
 
  •   develop a formal written profit plan to ensure adequate capital is maintained at the Banks (the Company has an on-going three year budget process that looks at the Banks’ profitability on a short and long-term basis, with capital retention being a primary consideration. The Banks continued to be well capitalized through September 30, 2010); and
 
  •   not pay dividends, management fees or bonuses, or incur any executive salary or other compensation that would reduce the Banks below well capitalized status (while the Company has added to its management ranks in 2010, no such payouts have occurred). Management compensation levels have always been considered moderate. Additionally, the Company has not paid dividends on its common stock since inception, and effective in February 2011, will temporarily defer dividend payments on its preferred stock.
      As noted in the disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 4 of our 2009 Annual Report on Form 10-K, we do not expect the actions called for by the regulatory agreements/MOUs to change our business strategy in any material respect, although they may have the effect of limiting or delaying our ability or plans to expand. Should this change, we will disclose such changes in future filings. It should be noted that the Banks’ capital ratios were above regulatory levels for being characterized as “well capitalized” at September 30, 2010. Additionally, the agreements do not specify any specific levels for the reserve for loan losses or require any change in methodology. Company management acknowledges that in the normal course of dealing with an increased level of problem asset situations and a more uncertain lending environment that there has been, and will continue to be, an evolution of processes and procedures in striving to enhance the management of the situation. Prior to the economic downturn that has gripped our nation during the past three years, the Company had very few problem assets and minimal charge-offs.

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 4
Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations for the Three-Year Period Ended December 31. 2009, page 21
  2.   Please revise your future filings to focus on management’s analysis of known material trends, events, demands, commitments and uncertainties related to your results of operations rather than merely restating financial statement information in a narrative form. Your analysis should consist of material substantive information (both quantitative and qualitative) and present a balanced view of the underlying dynamics of the company’s business. In your discussion of known material trends, events, demands, commitments and uncertainties, you should consider including an analysis explaining the underlying reasons or implications, interrelationships between constituent elements, and the relative significance of those matters. In providing your analysis, you may find it helpful to include a discussion of key variables, such as industry specific metrics, and financial measures management utilizes in managing the business. Refer to Item 303(A)(3) of Regulation S-K and our website (http://www.sec.gov/rules/interp//338350.htm) for additional guidance.
 
      Company Response: Company management acknowledges the Staff’s comments and will strive in future filings to enhance the disclosures provided when discussing the Company’s results of operations. Based on previous comments received from the Commission in our initial filing on Form 10, we have always attempted to provide a summary of the numerical changes in the results of operations, financial position, and liquidity, followed by the primary reasons for such changes.
 
      Credit Risk Management, page 29
  3.   We note that nonperforming loans totaled approximately $72 million or 6.32% of total loans at December 31, 2009 and approximately $94 million or 8.80% of total loans at June 30, 2010; also that the allowance for loan losses amounted to $32.2 million or 2.82% of total loans and $36.2 million or 3.39% of total loans at December 31, 2009 and June 30, 2010, respectively. We also note that your nonperforming loans increased by approximately $60 million from 2008 through June 30, 2010, while your allowance increased $22 million in that same time. Please tell us and more clearly disclose in future filings the relationships between such key performance indicators (i.e., the allowance for loan losses; non-performing loans, non-performing loan coverage ratio, etc.) and the specific causal factors that triggered such growth. In your disclosure, provide an analysis of the specific and general components of your allowance for loan losses detailing how you determined that each component was directionally consistent with the underlying credit

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 5
      quality of the applicable loan portfolio. Please be as specific and detailed as needed to provide an investor with a clear understanding of the changes in credit quality in each applicable loan portfolio and its effect on each component of the allowance for loan loss.
      Company Response: Since its inception in 1999, the Company has experienced significant loan growth in the St. Louis metropolitan area, and in the Ft. Myers area of Florida, with expansion to that area by the Company in 2005. The southwestern Florida area began experiencing economic distress ahead of most of the country, with the long-booming real estate market in Florida beginning its decline in 2007. As a result, the Company began experiencing an increase in troubled asset situations in 2007 and began increasing its reserve for loan losses accordingly as the Florida real estate market weakened. In 2010, after two and one-half years of a free-fall decline in Florida real estate values, Company management believes that the Florida real estate market has begun to stabilize at the low valuation levels to which it has dropped during this economic recession. While the Florida real estate market has begun to stabilize, the real estate markets in the St. Louis metropolitan area (as well as the Houston, Texas and Phoenix, Arizona markets in which the Company has established loan production offices) continue to experience increased stress. Throughout this time period, the Company has attempted to address this dichotomy of markets with the tables presented in its filings that portray the degree to which these geographic areas have been the source of problems.
      While considering the level of nonperforming assets when assessing the appropriate level of the reserve for loan losses at a particular point in time, the Company does not use a pre-assigned coverage ratio of nonperforming assets. Since a significant percentage of the Company’s loan portfolio is concentrated in commercial and construction real estate (as discussed in its filings), the most significant determining factor when determining an appropriate level for the reserve for loan losses is a detailed analysis of the individual credit relationships and their potential for loss after considering the value of the underlying real estate collateral. During the past three years (first in Florida and then migrating to the Company’s other markets in St. Louis, Houston and Phoenix), the Company has experienced continued declines in collateral values (e.g., one credit relationship had collateral with a current appraised value of $2,000,000 at the end of 2008 and a current appraised value of $1,000,000 at the end of 2009 for the same property). Company management has assessed that this additional uncertainty has warranted caution in assessing an appropriate level for the reserve for loan losses, and that somewhat greater conservatism is warranted at this time to ensure that the reserving reflects the level of losses inherent within the portfolio at a particular point in time.

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 6
      The Company risk rates all of the loans in its loan portfolio, using a 1-7 risk rating system, with a “1” – rated credit being a high quality loan and a “7” – rated credit having some level of loss in the credit. Loan officers are responsible for risk-rating their own credits, including maintaining the risk rating on a current basis. Downgrades are discussed at various management and loan committee meetings. The risk ratings are also subject to an on-going review by an extensive loan review process performed independent of the loan officers. An adequately-controlled risk rating process allows Company management to conclude that the Banks’ watch lists (which include all credits risk-rated “4” or greater) are, for all practical purposes, a complete profile of situations with current loss exposure.
      All loans included in the watch lists require separate action plans to be developed to reduce the level of risk inherent in the credit relationship. Based on the information included on the watch list and a review of each individual credit relationship thereon, the Company determines whether a credit is impaired. The Banks consider a loan to be impaired when all amounts due – both principal and interest – will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (and marketability), and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
      When measuring impairment for loans, the expected future cash flows of impaired loans are discounted at the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of collateral for a collateral dependent loan; however, substantially all of the Company’s presently impaired credit relationships are collateralized (and derive their ultimate cash flows therefrom) by commercial, construction, or residential real estate and, accordingly, virtually all of the Company’s impairment calculations for the present portfolio have been based on the underlying values of the real estate collateral.
      The Banks’ watch lists include complete listings of credit relationships that are considered to be impaired, along with an assessment of the estimated impairment loss to be included as specific exposure for impaired loans. Such impairment calculations are based on current (less than six months old) appraisals of the underlying real estate collateral. The Company regularly obtains updated appraisals for all of its impaired credit relationships. As noted

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 7
      above, the continued decline in real estate values experienced by the Company during the past three years has resulted in an increased level of the reserve for loan losses for these specifically identifiable impairment losses.
      The sum of all exposure amounts calculated for impaired loans are included in the reserve for loan losses as the specifically-identifiable losses portion of the account balance. This is one portion of the reserve for loan losses. The second portion of the reserve for loan losses is a general reserve for all credit relationships not considered to be specifically impaired. This amount is calculated by first calculating the historical charge-off ratio for each of the particular loan categories and then subjectively adjusting these historical ratios for several economic and environmental factors. The adjusted ratio for each loan category is then applied against the non-impaired loans in that loan category, resulting in a general reserve for that particular loan category. The sum of these general reserve categories, when added to the amount of specifically identified losses on impaired credits, results in the final reserve for loan losses balance for a particular date. The Banks follow this process for calculating the reserve for loan losses on a quarterly basis.
      In calculating the general portion of the reserve for possible loan losses, the loan categories used are real estate construction, residential real estate, commercial real estate, commercial and industrial, and consumer loans. Historical charge-off ratios have been calculated on a rolling three year basis, which has resulted in higher reserve levels with the increased levels of charge-offs experienced during the past three years. Beginning in the fourth quarter of 2010, the Company has reduced this historical “look-back” period to a rolling 24 month period, on a consolidated basis, to more closely relate current periods with the most recent historical data, and thus require less adjustment for the other environmental factors.
      The economic and environmental factors for which adjustments are made to the historical charge-off ratios include the following:
  •   changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
 
  •   changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
 
  •   changes in the nature and volume of the portfolio and in the terms of loans.

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 8
  •   changes in the experience, ability, and depth of lending management and other relevant staff.
 
  •   changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
 
  •   changes in the quality of the Banks’ loan review systems.
 
  •   changes in the value of underlying collateral for collateral-dependent loans.
 
  •   the existence and effect of any concentrations of credit, and changes in the level of such concentrations.
 
  •   the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Banks’ existing portfolios.
At December 31, 2009, the Company’s consolidated reserve for loan losses calculation had the following components (in thousands of dollars):
      Specifically identifiable exposure on impaired loans:
                         
Loan Type   # of credits     Loan balance     Exposure  
Real estate construction
     26     $ 41,737     $ 9,772  
Residential real estate
     14       4,459       830  
Commercial real estate
     21       50,798       5,737  
Commercial and industrial
     2       1,148       384  
Consumer
     1       2       1  
 
                  
 
           $ 98,144     $ 16,724  
 
                    
      General reserve for non-impaired credits:
                                 
    Historical     Adjusted              
    charge-off     charge-off     Non-impaired     Calculated  
Loan Type   percentage     percentage     loan balance     reserve  
Real estate construction
     3.35 %     3.91 %   $ 130,994     $ 5,125  
Residential real estate
     1.00 %     1.46 %     80,199       1,167  
Commercial real estate
     1.04 %     1.14 %     746,256       8,519  
Commercial and industrial
     0.31 %     0.71 %     81,585       581  
Consumer
     1.24 %     2.86 %     3,703       106  
 
                            
 
                   $ 1,042,737       15,498  
 
                            
Total reserve calculated
                           $ 32,222  
 
                              

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 9
At June 30, 2010, the Company’s consolidated reserve for loan losses calculation had the following components (in thousands of dollars):
      Specifically identifiable exposure on impaired loans:
                         
Loan Type   # of credits     Loan balance     Exposure  
Real estate construction
     23     $ 37,929     $ 6,413  
Residential real estate
     13       3,018       782  
Commercial real estate
     24       75,487       10,900  
Commercial and industrial
     7       1,268       442  
Consumer
     3       85       30  
 
                    
 
           $ 117,787     $ 18,567  
 
                    
      General reserve for non-impaired credits:
                                 
    Historical     Adjusted              
    charge-off     charge-off     Non-impaired     Calculated  
Loan Type   percentage     percentage     loan balance     reserve  
Real estate construction
     4.79 %     6.37 %   $ 88,059     $ 5,610  
Residential real estate
     1.16 %     2.03 %     79,607       1,617  
Commercial real estate
     1.16 %     1.36 %     688,757       9,385  
Commercial and industrial
     0.23 %     1.00 %     89,734       898  
Consumer
     1.22 %     2.91 %     2,955       86  
 
                            
 
                   $ 949,112       17,596  
 
                            
Total reserve calculated
                           $ 36,163  
 
                              
      In future filings, we have and will include disclosures similar to that provided above to comply with the Staff’s comments.
  4.   We note your disclosure on page 31 that it is the Company’s practice to consider and act upon borrowers’ request for renewal of loans at maturity. Please provide in future filings (in tabular format) a summary of loans by type, amount, status at the time of renewal (i.e., accrual, non-accrual, 90 days delinquent and still accruing interest and troubled debt restructuring) and status after renewal.
 
      Company Response: The renewal of loans at maturity is a standard and acceptable lending practice by all financial institutions, depending on the particular circumstances of a given lending situation. We infer that the Staff’s concern is primarily directed to problem situations. This level of detail is not a required disclosure nor does it appear to have been provided by the vast majority of other financial institutions on a recurring basis. We believe our responses to other credit quality questions below should allay the Staff’s

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 10
      concerns. The Company does not change the status of a nonperforming loan strictly by renewing the credit and therefore, the act of renewing a loan has no material effect on the Company’s liquidity. We respectfully request that the Staff consider our responses to comments below as sufficient to address the Staff’s concerns regarding loan renewal.
  5.   Please tell us and revise future filings to discuss in greater detail how you evaluate the various types of loans in your portfolio for impairment and how you measure the associated impairment, clarifying for which loans types you use the present value of expected future cash flows discounted at the loan’s effective interest rate, observable market price, if available, or the fair value of the collateral. Please provide your proposed disclosure in the response to this comment.
 
      Company Response: As we state in response to Comment 3, virtually all of the impaired loans in the Banks’ current portfolios are secured by real estate, primarily commercial or construction property. Accordingly, impairment has been calculated based on current “as is” appraisals of the underlying real estate collateral. We respectfully request that the Staff consider our disclosure provided in response to Comment 3, in addition to the disclosure provided herein, as sufficient to address the Staff’s concerns about future filings.
  6.   Please tell us and revise future filings to disclose the amount of loans and the amount of specific reserve calculated based on discounted cash flows, observable market price or fair value of collateral. For your collateral dependent loans, disclose:
  •   How often and when updated third party appraisals are obtained and how this impacts the amount and timing of your loan loss provisions and charge-off’s.
  •   Whether and why you make any adjustments to appraisals including any made as a result of outdated appraisals.
  •   The type of appraisals used to measure impairment such as “retail value” or “as is” value. If you use “retail value” please explain how you reconcile this value to the amount used to measure impairment.
  •   If external appraisals are not used to determine the value of the underlying collateral or where an appraisal has not been updated, disclose your processes and procedures for estimating the value of the collateral.
      Company Response: Virtually all of the exposure computed on impaired loans as noted in our response to Comment 5 relates to real estate collateral. As we state in response to

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 11
      Comment 3 above, current external appraisals are obtained or updated at least every six months on problem credits. All appraisals received are reviewed for reasonableness of assumptions used. When an appraisal appears to be unrealistic, a second appraisal is obtained from another independent appraiser. Loans are charged off when deemed uncollectible. We respectfully request that the Staff consider our disclosure provided in response to Comment 3, in addition to the disclosure provided herein, as sufficient to address the Staff’s concerns about future filings.
Financial Statements for the Fiscal Year Ended December 31, 2009
Consolidated Statements of Operations, page F-4
  7.   We note you have adopted ASC 320-10 in 2009; however, your presentation within this financial statement does not appear consistent with such guidance. Please advise and revise as necessary.
 
      Company Response: We have revised the information presented in the consolidated statements of operations, as provided in the attached Exhibit 7.1 for the 2009 annual consolidated financial statements, the attached Exhibit 7.2 for the September 30, 2010 and 2009 consolidated statements of operations included in the September 30, 2010 Form 10-Q, the attached Exhibit 7.3 for the June 30, 2010 and 2009 consolidated statements of operations included in the June 30, 2010 Form 10-Q, the attached Exhibit 7.4 for the March 31, 2010 and 2009 consolidated statements of operations included in the March 31, 2010 Form 10-Q, and the attached Exhibit 7.5 for the September 30, 2009 and 2008 consolidated statements of operations included in the September 30, 2009 Form 10-Q. Updated information on these statements is highlighted in these Exhibits.
 
      Once the Staff has concluded its review, we will revise our 2009 Form 10-K, and any applicable filings on Form 10-Q, as may be necessary.
  8.   We note you issued preferred stock to the U.S. Treasury in connection with your participation in the TARP. Please explain why you have not presented preferred dividends and net (loss)/income available to common stockholders’ on the face of this financial statement. Further, explain why your (loss)/earnings per share amounts were not impacted by the preferred dividends paid. Please advise and revise as necessary.
 
      Company Response: Preferred dividends and income (loss) available to common shareholders were inadvertently omitted from the consolidated statement of operations. We have revised the information presented in the consolidated statements of operations, as

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 12
      provided in the attached Exhibit 7.1 for the 2009 annual consolidated financial statements, the attached Exhibit 7.3 for the June 30, 2010 and 2009 consolidated statements of operations included in the June 30, 2010 Form 10-Q, the attached Exhibit 7.4 for the March 31, 2010 and 2009 consolidated statements of operations included in the March 31, 2010 Form 10-Q, and the attached Exhibit 7.5 for the September 30, 2009 and 2008 consolidated statements of operations included in the September 30, 2009 Form 10-Q. Updated information on these statements are highlighted in these Exhibits.
      Once the Staff has concluded its review, we will revise our 2009 Form 10-K, and any applicable filings on Form 10-Q, as may be necessary.
Notes to Consolidated Financial Statements
Note 1 — Summary of Significant Accounting Policies
Investment in Debt Securities, page F-9
  9.   We note on page 23 that that you adopted ASC 320-10 during 2009. Please revise your future filings to include the required assertions regarding your other than temporary impairment policy and remove the “intent and ability to hold” assertion. If true, please confirm these assertions in your response letter to address December 31, 2009 and June 30, 2010. Please provide your proposed disclosure in the response to this comment.
 
      Company Response: We confirm that the following assertions were appropriate at December 31, 2009 and June 30, 2010, which will replace the last paragraph of our investment policy footnote in future filings with the following paragraph:
      Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in operations as realized losses. In estimating other-than-temporary impairment losses, management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. The analysis requires management to consider various factors, which include (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether it’s more likely than not that the Company would be required to sell the security before its anticipated recovery in market value.

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 13
Loans, page F-10
  10.   We note your disclosure here and at various other points in the filing that discusses analyses you performed related to the allowance for credit losses in terms of determining the amount of “potential loss” and “possible loss”. This disclosure would imply that you are attempting to project or forecast changes in facts and circumstances after the balance sheet date. Please explain how this supports an incurred, rather than expected, loss model. Please advise and revise as necessary. Additional information is available in Section II.P.1 of the Current Accounting and Disclosure Issues in the Division of Corporation Finance Outline dated November 30, 2006 available on our web-site (http://www.sec.gov/divisions/corpfin/cfacctfinrptfrms.shtm1). Please provide your proposed disclosure in the response to this comment.
 
      Company Response: The Company’s processes for establishing the reserve for loan losses seek to ascertain an evaluation of the losses inherent in the loan portfolio at a particular point in time, with due consideration as to the uncertainties of identifying all situations and developing an assessment of the probable loss incurred. Only subsequent actions such as foreclosure and sale of a property evidence finalization of a process that is inherently one of estimation. The Company’s processes to establish an appropriate level of the reserve for loan losses do not attempt to project future losses, but such processes do seek insight as to the extent assessments may not have identified all situations nor estimated the full extent of the loss. As a practical matter, all financial institutions contend with the same uncertainties and that is why an allocation of the reserve for possible loan losses to demonstrate an aspect of management’s assessment always has an “unallocated” portion.
 
      In future filings, we will attempt to avoid using language that might lead a reader of the financial statements to infer that a projection into the future is being performed. In future filings, the last sentence on page F-10 will be reworded as follows:
      The provision charged to operations each year is that amount which management believes is sufficient to bring the balance of the reserve to a level adequate to absorb estimated losses inherent in the loan portfolio, based on its knowledge and evaluation of past losses, the current loan portfolio, and the current economic environment in which the borrowers of the Banks operate.

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 14
Note 3 — Investment in Debt Securities, page F-17
  11.   We refer to your investment securities tables on pages F-17. ASC 320-10-50 provides that the disclosures required shall be provided by major security type. Although section 50 provides a list of security types to be presented by financial institutions, it states that additional security types may be necessary and that a company should consider certain characteristics (e.g., business sector, vintage, geographic concentration, credit quality, economic characteristics) in determining whether it is necessary to separate further a particular security type in greater detail. Accordingly, please provide us with, and revise your future filings to disclose, your major security types in greater detail as follows:
  •   Separately disclose residential mortgage-backed securities, commercial mortgage-backed securities, and collateralized debt obligations, as these major security types are specifically required for financial institutions based on the guidance in ASC 320-10-50;
  •   Consider further segregating your mortgage-backed securities by vintage, credit quality (e.g., prime, subprime) or other loan characteristics (e.g., Alt-A, interest-only, agency vs. non-agency) based on the nature and risks of the securities; and
  •   Consider further segregating your trust preferred securities by type (e.g., single issuer vs. pooled) and class/tranche held (e.g., senior, mezzanine).
      Company Response: Following are the requested disclosures for December 31, 2009 and 2008, provided in a format that we will use in future filings:

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 15
      The amortized cost, gross unrealized gains and losses, and estimated fair values of the Banks’ available-for-sale debt securities at December 31, 2009 and 2008 were as follows:
                                 
            Gross     Gross     Estimated  
    Amortized     unrealized     unrealized     fair  
2009   cost     gains     losses     value  
Obligations of U.S. Government agencies and corporations
   $ 116,150,389       273,013       (978,159 )     115,445,243  
Obligations of state and political subdivisions
     30,012,602       651,846       (12,863 )     30,651,585  
Trust preferred collateralized debt obligations
     3,697,211       —       (2,459,474 )     1,237,737  
U.S. agency residential mortgage-backed securities
     134,883,536       2,430,220       (528,765 )     136,784,991  
 
                        
 
   $ 284,743,738       3,355,079       (3,979,261 )     284,119,556  
 
                        
                                 
            Gross     Gross     Estimated  
    Amortized     unrealized     unrealized     fair  
2008   cost     gains     losses     value  
Obligations of U.S. Government agencies and corporations
   $ 65,973,705       1,520,692       (6,577 )     67,487,820  
Obligations of state and political subdivisions
     34,063,983       141,586       (525,473 )     33,680,096  
Trust preferred collateralized debt obligations
     4,073,332       —       (2,656,603 )     1,416,729  
Other debt securities
     2,225,013       —       (66,780 )     2,158,233  
U.S. agency residential mortgage-backed securities
     87,711,440       1,547,923       (113,749 )     89,145,614  
 
                        
 
   $ 194,047,473       3,210,201       (3,369,182 )     193,888,492  
 
                        
      Please see our response to Comment 12 for further clarification of the various components of the Company’s investment securities.
  12.   Please provide us with, and revise you future filings to include, the table required by paragraph ASC 320-10-50-6 & 7.
 
      Company Response: Following are the requested disclosures for December 31, 2009 and 2008 (including adding the second year to that already disclosed in Note 3 on page F-18), provided in a format that we will use in future filings:

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 16
      Provided below is a summary of available-for-sale securities which were in an unrealized loss position at December 2009 and 2008:
                                                 
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
2009   fair value     losses     fair value     losses     fair value     losses  
Obligations of U.S. Government agencies and corporations
   $ 76,621,565       (978,159 )     —       —       76,621,565       (978,159 )
Obligations of states and political subdivisions
     3,663,692       (12,863 )     —       —       3,663,692       (12,863 )
TRUP CDOs
     —       —       1,237,737       (2,459,474 )     1,237,737       (2,459,474 )
U.S. agency residential mortgage-backed securities
     53,124,575       (528,399 )     54,376       (366 )     53,178,951       (528,765 )
 
                                    
 
   $ 133,409,832       (1,519,421 )     1,292,113       (2,459,840 )     134,701,945       (3,979,261 )
 
                                    
                                                 
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
2008   fair value     losses     fair value     losses     fair value     losses  
Obligations of U.S. Government agencies and corporations
   $ 1,430,365       (6,577 )     —       —       1,430,365       (6,577 )
Obligations of states and political subdivisions
     20,034,238       (525,473 )     —       —       20,034,238       (525,473 )
TRUP CDOs
     —       —       1,416,729       (2,656,603 )     1,416,729       (2,656,603 )
Other debt securities
     1,157,603       (66,446 )     1,000,630       (334 )     2,158,233       (66,780 )
U.S. agency residential mortgage-backed securities
     22,092,007       (113,749 )     —       —       22,092,007       (113,749 )
 
                                    
 
   $ 44,714,213       (712,245 )     2,417,359       (2,656,937 )     47,131,572       (3,369,182 )
 
                                    
      The obligations of U.S. Government agencies and corporations and U.S. agency residential mortgage-backed securities with unrealized losses at December 31, 2009 and 2008 are primarily issued and guaranteed by the Federal Home Loan Bank, Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation. Obligations of states and political subdivisions in an unrealized loss position are primarily comprised of municipal bonds with adequate credit ratings, underlying collateral, and/or cash flow projections.
 
      The market for trust preferred collateralized debt obligations (TRUP CDOs) at December 31, 2009 and 2008 was not active and markets for similar securities were also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which TRUP CDOs trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive as a minimal number of TRUP CDOs have been issued since 2007. Very few market participants are willing and/or able to transact for these securities. The market values for these securities are very depressed relative to historical levels. During 2009, the level of defaults of the underlying financial institutions

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 17
      supporting certain of the TRUP CDOs increased to a level that resulted in an other-than-temporary impairment loss on such instruments. Accordingly, the Company incurred credits losses on these TRUP CDOs of $340,957.
      The TRUP CDOs at December 31, 2009, March 31, 2010, June 30, 2010, September 30, 2010, and September 30, 2009 were comprised of the following four separate pooled issuances:
                                                                     
    December 31, 2009  
                                                        Actual        
                                                        Deferrals        
                                                        and     Excess  
                                                        Defaults     Subordination  
                                        Lowest Credit           as a     as a Percent  
                                        Rating       Banks/   Percentage     of the  
                                Discounted     Assigned   Number   Insurers   of the     Remaining  
        Original     Amortized     Fair     Cash     to the Security   of Banks/   Currently   Original     Performing  
Number   Class   Par     Cost     Value     Flow     Moody’s   Fitch   Insurers   Performing   Collateral     Collateral  
1
   C   $ 1,000,000     $ 1,000,000     $ 494,432     $ 1,001,928     NR   CCC   25   24     7.40 %     1.40 %
2
   B     1,000,000       931,326       323,849       978,864     Ca   CC   56   45     15.60 %     (12.30 )%
3
   B-1     1,000,000       1,002,921       394,297       1,006,859     Ca   C   64   44     17.80 %     12.90 %
4
   B     2,000,000       762,964       25,159       762,964     Caa3   CCC   59   15     9.30 %     (29.70 )%
 
                                                                
 
               $ 3,697,211     $ 1,237,737                                          
 
                                                                

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 18
                                                                     
    March 31, 2010  
                                                        Actual        
                                                        Deferrals        
                                                        and     Excess  
                                                        Defaults     Subordination  
                                        Lowest Credit           as a     as a Percent  
                                        Rating       Banks/   Percentage     of the  
                                Discounted     Assigned   Number   Insurers   of the     Remaining  
        Original     Amortized     Fair     Cash     to the Security   of Banks/   Currently   Original     Performing  
Number   Class   Par     Cost     Value     Flow     Moody’s   Fitch   Insurers   Performing   Collateral     Collateral  
1
   C   $ 1,000,000     $ 1,000,000     $ 535,969     $ 1,001,519     NR   CCC   25   24     7.40 %     1.40 %
2
   B     1,000,000       927,777       312,569       974,465     Ca   CC   56   44     17.60 %     (14.80 )%
3
   B-1     1,000,000       1,007,492       394,014       949,675     Ca   C   64   43     20.90 %     (16.00 )%
4
   B     2,000,000       762,964       23,535       793,089     Caa3   CCC   59   15     9.30 %     (26.70 )%
 
                                                                
 
               $ 3,698,233     $ 1,266,087                                          
 
                                                                
                                                                     
    June 30, 2010  
                                                        Actual        
                                                        Deferrals        
                                                        and     Excess  
                                                        Defaults     Subordination  
                                        Lowest Credit           as a     as a Percent  
                                        Rating       Banks/   Percentage     of the  
                                Discounted     Assigned   Number   Insurers   of the     Remaining  
        Original     Amortized     Fair     Cash     to the Security   of Banks/   Currently   Original     Performing  
Number   Class   Par     Cost     Value     Flow     Moody’s   Fitch   Insurers   Performing   Collateral     Collateral  
1
   C   $ 1,000,000     $ 1,000,000     $ 510,763     $ 1,002,923     NR   CCC   25   24     7.40 %     1.90 %
2
   B     1,000,000       930,307       307,265       977,453     Ca   CC   56   42     20.50 %     (18.20 )%
3
   B-1     1,000,000       954,381       345,439       960,212     Ca   C   64   40     21.70 %     (16.70 )%
4
   B     2,000,000       762,964       23,469       779,203     Caa3   CCC   59   15     9.30 %     (29.70 )%
 
                                                                
 
               $ 3,647,652     $ 1,186,936                                          
 
                                                                

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 19
                                                                     
    September 30, 2010  
                                                        Actual        
                                                        Deferrals        
                                                        and     Excess  
                                                        Defaults     Subordination  
                                        Lowest Credit           as a     as a Percent  
                                        Rating       Banks/   Percentage     of the  
                                Discounted     Assigned   Number   Insurers   of the     Remaining  
        Original     Amortized     Fair     Cash     to the Security   of Banks/   Currently   Original     Performing  
Number   Class   Par     Cost     Value     Flow     Moody’s   Fitch   Insurers   Performing   Collateral     Collateral  
1
   C   $ 1,000,000     $ 1,000,000     $ 519,351     $ 1,004,489     NR   CCC   25   24     7.40 %     2.50 %
2
   B     1,000,000       933,359       263,203       980,221     Ca   CC   56   41     21.90 %     (19.90 )%
3
   B-1     1,000,000       813,880       272,127       813,880     Ca   C   64   38     27.20 %     (22.90 )%
4
   B     2,000,000       616,441       23,701       616,441     Caa3   CCC   59   14     11.10 %     (46.90 )%
 
                                                                
 
               $ 3,363,680     $ 1,078,382                                          
 
                                                                
                                                                     
    September 30, 2009  
                                                        Actual        
                                                        Deferrals        
                                                        and     Excess  
                                                        Defaults     Subordination  
                                        Lowest Credit           as a     as a Percent  
                                        Rating       Banks/   Percentage     of the  
                                Discounted     Assigned   Number   Insurers   of the     Remaining  
        Original     Amortized     Fair     Cash     to the Security   of Banks/   Currently   Original     Performing  
Number   Class   Par     Cost     Value     Flow     Moody’s   Fitch   Insurers   Performing   Collateral     Collateral  
1
   C   $ 1,000,000     $ 1,000,000     $ 554,932     $ 1,003,129     NR   CCC   25   24     7.40 %     0.34 %
2
   B     1,000,000       934,789       486,794       983,120     Ca   CC   56   47     10.00 %     (6.60 )%
3
   B-1     1,000,000       1,000,000       516,659       1,004,104     Ca   C   64   46     10.70 %     (5.80 )%
4
   B     2,000,000       784,000       33,173       784,000     Caa3   CCC   59   15     9.30 %     (29.70 )%
 
                                                                
 
               $ 3,718,789     $ 1,591,558                                          
 
                                                                
      We reviewed our pools and determined that the collateral should be divided between two specific industries for credit analysis: banks and insurance companies. We then determined the industry specific default rates for the two industries. The bank rate was determined by reviewing each individual institution and its performance. The insurance company rate was determined by examining a study by a well known rating agency that displayed the average one-year impairment rate.
      To determine a pool-specific loss rate we determined that a common indicator was needed for each issuer. For banks, we obtained an estimated CAMELS rating from a well known financial institution rating service to use as an indicator of default

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 20
      probability. We then adjusted the default rate from 0.20% to 1.00% based on the obtained CAMELS rating. For insurance companies we obtained the rating for the primary insurance company to use as an indicator of default probability. We modified the default rate from 0.25% to 1.25% based on the ratings.
      To obtain the expected annual default rate for the pool we took the weighted average rating for each issuer based on remaining issuance amount as a percentage of total remaining collateral. Any issuer with a specific default rate was only weighted by the portion of the issuance remaining after the application of the specific default rate. The Company reviews the assumptions quarterly for reasonableness and will update those assumptions that management believes have changed given market conditions, changes in deferral and defaults, as well as other factors that can impact these assumptions. Based on the results of this analysis, the Company ensures that actual deferrals/defaults as well as forecasted deferrals/defaults of specific institutions are appropriately factored into the cash flow projections for each security.
 
      In the tables above, “Excess Subordination as % of Performing Collateral” (Excess Subordination Ratio) was calculated as follows: (Total face value of performing collateral — Face value of all outstanding note balances not subordinate to our investment)/Total face value of performing collateral. The Excess Subordination Ratio measures the extent to which there may be tranches within each pooled trust preferred structure available to absorb credit losses before the Company’s securities would be impacted. The positive Excess Subordination Ratio signifies there is some support from subordinate tranches available to absorb losses before the Company’s investment would be impacted, while the negative Excess Subordination Ratio for each of the mezzanine tranche securities indicates there is no support. A negative Excess Subordination Ratio is not definitive, in isolation, for determining whether or not an other-than-temporary credit loss should be recorded for a pooled trust preferred security. Other factors affect the timing and amount of cash flows available for payments to the note holders (investors), including the excess interest paid by the issuers (the issuers typically pay higher rates of interest than are paid out to the note holders).
 
      This additional information will be included in our future filings.
  13.   We note the significant unrealized losses related to your trust preferred and non-agency mortgage backed securities at December 31, 2009. Please address the following:

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 21
  •   Provide us with a full detailed analysis of these securities’ impairment as of December 31, 2009 and June 30, 2010 that identifies all available evidence, explain the relative significance of each piece of evidence, and identify the primary evidence on which you rely to support a realizable value equal to or greater than the carrying value of the investment; and
 
  •   Provide us, and consider disclosing in future filings, a table detailing the following information for your trust preferred securities: deal name, class, book value, fair value, unrealized gain/loss, credit ratings, number of banks in issuance, deferrals and defaults as a percentage of collateral, and excess subordination after taking into account your best estimates of future interest deferrals and defaults.
      Company Response: The Company had no non-agency mortgage-backed securities at December 31, 2009 or June 30, 2010. We respectfully request that the staff consider as sufficient in response to their comment our proposed disclosures regarding expanded information about the four trust preferred issuances maintained by the Company at December 31, 2009 and June 30, 2010 and 2009 in our response to Comment 12 above in which we provide information about the book and fair values of each of our four trust preferred pools and the present value of the cash flows therefrom at December 31, 2009 and March 31, 2010, June 30, 2010, September 30, 2010, and September 30, 2009. For determining the credit losses for these securities, the Company has used discounted cash flow analyses provided by independent valuation firms. These valuations use various assumptions about default rates, recovery rates, etc. based on the financial condition of the individual financial institutions in the pools. On an annual basis (beginning in December 31, 2010), the Company has also obtained a second valuation analyses of the four securities in question. This valuation which was recently received, validated the previous estimates, including the default rates used in the calculation of discounted cash flow projections.
Note 7 — Income Taxes, page F-22
  14.   We note you have no deferred tax asset valuation allowance reported for the periods presented. We understand that the determination of whether or not a valuation allowance is necessary is difficult and requires judgment, particularly when there is significant negative evidence. Please provide us with an analysis, for the year ended December 31, 2009 and the subsequent interim reporting periods, detailing both the positive and negative evidence considered to overcome such significant negative evidence (e.g., cumulative losses, MOUs, etc.) in determining the extent of any valuation allowance. Refer to ASC 740-10-30-21. To the extent that you believe a full valuation allowance is not warranted,

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 22
      tell us and provide a clear discussion addressing the reasons why you believe that it is “more likely than not” that future earnings will be sufficient to realize the remaining deferred tax assets. Refer to ASC 740-10-30-5.
      Company Response: The components of the Company’s net deferred tax assets at December 31, 2009 are included on page F-23 of the Company’s 2009 Form 10-K, and include deferred tax assets of $5,014,352 for net operating losses of $15,151,862 for Federal income taxes that must be used by 2029, and a deferred tax asset of $565,114 for net operating losses of $10,274,802 for Florida state income taxes that must be used by 2023. Until December 31, 2009, the Company was in a net tax loss carryback position for Federal tax reporting purposes and in fact, received $2,019,898 of back taxes from the filing of its December 31, 2009 consolidated Federal income tax return. All other deferred tax assets have no time limit for their realization and in theory, will reverse in a relatively short time period (e.g., the deferred tax assets relating to the reserve for loan losses will in fact reverse as loans for which the reserve is maintained are charged off), which will create additional net operating loss carryforwards when the particular items turnaround, unless sufficient taxable income is available to offset such deductions.
      The Company has twenty years to utilize the Federal tax credit carryforward and fourteen years to utilize the Florida state tax credit carryforward, and believes that sufficient levels of taxable income will be generated during this time period to utilize the net operating loss carryforward for tax reporting purposes. The Company had been a profitable entity prior to the current economic downturn. It has expanded its underlying retail network and is well capitalized, which should allow for profitability to again be achieved as we come out of the economic recession. The Company’s net interest margin has improved significantly in the past year and operating expenses have been well controlled. Company management believes that its prognosis for continued existence and profitable operating performance is inherently positive, even as significant losses are being incurred presently. The Company’s short and long-term projections call for the Company to again begin recording profitable operations in 2012 or 2013 on a consolidated basis and 2013 or 2014 for Reliance Bank, FSB.
      We understand the Securities and Exchange Commission’s position is to not look out more than 3-5 years, particularly for financial institutions that are presently operating under regulatory sanctions. We respectfully disagree with this position and believe it places no weight on this expanded future period and too much weight on the regulatory sanctions. However, given the additional losses incurred in 2010 resulting from the prolonged economic downturn in the markets which the Company operates (which increases the Bank’s cumulative losses, which is a negative factor which is difficult to overcome in

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 23
      assessing the need for a valuation allowance), we have established a valuation allowance of $24,766,000 in the fourth quarter or 2010 against the Company’s deferred tax assets. This valuation reserve is computed as follows (in thousands of dollars):
                 
Gross taxable loss relating to net operating loss carryforwards at December 31, 2009
           $ (15,152 )
Expected 2010 pretax loss
   $ (33,798 )        
Loan loss provision expense for 2010
     41,622          
Net loan charge-offs for 2010
     (37,219 )        
Net other real estate book/tax change — 2009 vs. 2010
     4,587          
Net deferred tax asset for other real estate
     (7,676 )        
Expected future charge-offs (FAS 114 reserve)
     (16,440 )     (48,924 )
 
            
Revised gross taxable loss relating to net operating loss carryforwards
             (64,076 )
X blended tax rate
             38.65 %
 
              
Valuation allowance
           $ 24,766  
 
              
      The establishment of a valuation allowance of $24,766,000 will leave approximately $8,575,000 of net deferred tax assets on the Company’s consolidated balance sheet at December 31, 2010, for which management believes realization is more likely than not. In assessing the need for an additional valuation allowance, the Company assessed the positive factors noted above against the negative factors of cumulative losses and regulatory sanctions, and also evaluated certain prudent tax planning alternatives, such as selling bank branches, selling available-for-sale debt securities that have appreciated in value, and reducing tax exempt securities and loans.

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 24
Form 10-Q for the Quarterly Period Ended June 30, 2010
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Month Periods Ended June 30, 2010 and 2009, page 22
  15.   We note you provide non-GAAP performance measures that appear to eliminate the effects of recurring items, particularly provision for loan loss and securities write-downs. It seems that the effects of such adjustments could more readily be discussed within the context of a GAAP based MD&A. Further, it is not clear how you have provided the required disclosures of Item 10(e) of Regulation S-K. Please advise, or revise your future filings to remove all such references to the non-GAAP measures. Please provide your proposed disclosure in the response to this comment.
 
      Company Response: The Company will cease using such non-GAAP disclosures in its future filings.
Notes to Consolidated Financial Statements
  16.   Considering the significance of your loan portfolio and the related allowance, please provide an interim summary of your loan loss experience (consistent with that of your presentation in Note 4, in your Form 10-K, page F-20), including the revisions noted in the aforementioned comments. Please provide your proposed disclosure in the response to this comment.
 
      Company Response: We will revise our future quarterly reports on Form 10-Q to include a rollforward of the reserve for loan losses in the footnotes to the interim financial statements, similar to that disclosed in our annual financial statements. Following is the related disclosure for the six months ended June 30, 2010 and 2009 (in thousands of dollars), which is an example of the disclosure we will provide in future filings:
                 
    2010     2009  
Balance, January 1
   $ 32,221       14,306  
Provision charged to operations
     17,320       16,250  
Charge-offs
     (13,653 )     (7,026 )
Recoveries of loans previously charged off
     275       515  
 
            
 
   $ 36,163       24,045  
 
            

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 25
  17.   Please provide to us, and revise your future filings to include, the disclosures required by ASC 320-10-50-6 and 50-7.
 
      Company Response: We will revise our future filings to include the information included in our response to Comment 12. Additionally, the following tables relate to our June 30, 2010 and 2009 financial statement disclosures.
                                                 
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
2010   fair value     losses     fair value     losses     fair value     losses  
Obligations of U.S. Government agencies and corporations
   $ —       —       —       —       —       —  
Obligations of states and political subdivisions
     —       —       —       —       —       —  
TRUP CDOs
     —       —       1,186,936       (2,460,716 )     1,186,936       (2,460,716 )
U.S. agency residential mortgage-backed securities
     —       —       —       —       —       —  
 
                                    
 
   $ —       —       1,186,936       (2,460,716 )     1,186,936       (2,460,716 )
 
                                    
                                                 
    Less than 12 months     12 months or more     Total  
    Estimated     Unrealized     Estimated     Unrealized     Estimated     Unrealized  
2009   fair value     losses     fair value     losses     fair value     losses  
Obligations of U.S. Government agencies and corporations
   $ 30,600,710       (240,101 )     —       —       30,600,710       (240,101 )
Obligations of states and political subdivisions
     13,441,099       (386,654 )     1,060,152       (53,740 )     14,501,251       (440,394 )
TRUP CDOs
     —       —       1,073,031       (2,843,549 )     1,073,031       (2,843,549 )
U.S. agency residential mortgage-backed securities
     2,649,071       (29,528 )     93,456       (769 )     2,742,527       (30,297 )
 
                                    
 
   $ 46,690,880       (656,283 )     2,226,639       (2,898,058 )     48,917,519       (3,554,341 )
 
                                    

 

 

Mr. Hugh West
Securities and Exchange Commission
March 4, 2011
Page 26
As requested in your comment letter, please be advised that we acknowledge that:
  •   the Company is responsible for the adequacy and accuracy of the disclosures in the filings with the Commission;
 
  •   staff comments or changes to disclosures in response to Staff comments do not foreclose the Commission from taking any action with respect to the Company’s filings; and
 
  •   the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
* * * * * *
Should you have any questions regarding the above responses or require any additional information, please do not hesitate to call us at (314) 569-7202.
Very truly yours,
RELIANCE BANCSHARES, INC.
Alan D. Ivie IV, Chief Executive Officer
Dale E. Oberkfell, Chief Financial Officer

 

 

Exhibit 7.1
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2009, 2008, and 2007
                         
    2009     2008     2007  
Interest income:
                        
Interest and fees on loans (note 4)
   $ 67,628,744       70,336,468       55,098,966  
Interest on debt securities:
                        
Taxable
     7,638,510       6,159,384       6,564,513  
Exempt from Federal income taxes
     1,272,637       1,524,562       1,533,958  
Interest on short-term investments
     49,305       188,793       489,535  
 
                  
Total interest income
     76,589,196       78,209,207       63,686,972  
 
                  
Interest expense:
                        
Interest on deposits (note 6)
     33,601,012       34,650,719       33,435,555  
Interest on short-term borrowings (note 8)
     356,258       2,290,008       2,380,580  
Interest on long-term Federal Home Loan Bank borrowings (note 9)
     5,047,542       4,774,541       1,792,913  
 
                  
Total interest expense
     39,004,812       41,715,268       37,609,048  
 
                  
Net interest income
     37,584,384       36,493,939       26,077,924  
Provision for possible loan losses (note 4)
     53,450,000       11,148,000       3,186,500  
 
                  
Net interest income after provision for possible loan losses
     (15,865,616 )     25,345,939       22,891,424  
 
                  
Noninterest income:
                        
Service charges on deposit accounts
     975,664       796,653       509,352  
Net gains on sale of debt securities (note 3)
     1,346,565       321,113       157,011  
Other noninterest income (note 5)
     1,602,853       1,564,769       1,309,433  
 
                  
Total noninterest income
     3,925,082       2,682,535       1,975,796  
 
                  
Noninterest expense:
                        
Other than temporary impairment losses on available-for-sale securities:
                        
Total other-than-temporary impairment losses
     1,078,763       —       —  
Less portion of other-than-temporary impairment losses recognized in other comprehensive income
     (737,806 )     —       —  
 
                  
Net impairment/loss realized
     340,957       —       —  
Salaries and employee benefits (note 10)
     13,867,628       15,915,090       13,073,159  
Other real estate expense
     6,163,313       1,582,598       306,537  
Occupancy and equipment expense (note 5)
     4,256,769       4,503,125       3,388,327  
FDIC assessments
     2,745,432       912,093       561,579  
Data processing
     1,950,227       1,880,968       1,499,199  
Advertising
     149,435       778,072       569,658  
Amortization of intangible assets
     16,288       16,288       16,288  
Other noninterest expenses
     4,556,340       3,839,356       2,875,560  
 
                  
Total noninterest expense
     34,046,389       29,427,590       22,290,307  
 
                  
Income (loss) before applicable income taxes
     (45,986,923 )     (1,399,116 )     2,576,913  
Applicable income tax expense (benefit) (note 7)
     (16,629,562 )     (1,079,886 )     461,966  
 
                  
Net income (loss)
   $ (29,357,361 )     (319,230 )     2,114,947  
 
                  
Net income (loss)
   $ (29,357,361 )     (319,230 )     2,114,947  
Preferred stock dividends
     (1,647,111 )     —       —  
 
                  
Net income (loss) available to common shareholders
   $ (31,004,472 )     (319,230 )     2,114,947  
 
                  
 
                        
Per share amounts:
                        
Basic earnings (loss) per share
   $ (1.49 )     (0.02 )     0.10  
Basic weighted average shares outstanding
     20,864,483       20,669,512       20,342,622  
Diluted earnings (loss) per share
   $ (1.49 )     (0.02 )     0.10  
Diluted weighted average shares outstanding
     20,881,108       21,063,065       21,336,623  
 
                  
See accompanying notes to consolidated financial statements.

 

 

Exhibit 7.2
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2010     2009     2010     2009  
Interest income:
                                
Interest and fees on loans
   $ 13,947,445       16,705,289       44,071,380       51,375,259  
Interest on debt securities:
                                
Taxable
     1,475,110       1,867,460       4,982,403       5,784,448  
Exempt from Federal income taxes
     262,589       312,195       863,501       962,426  
Interest on short-term investments
     2,928       7,076       35,471       29,817  
 
                        
Total interest income
     15,688,072       18,892,020       49,952,755       58,151,950  
 
                        
Interest expense:
                                
Interest on deposits
     4,514,514       7,835,261       15,769,633       26,017,912  
Interest on short-term borrowings
     33,792       22,734       90,543       330,272  
Interest on long-term Federal Home Loan Bank borrowings
     952,131       1,237,276       2,876,132       3,714,910  
 
                        
Total interest expense
     5,500,437       9,095,271       18,736,308       30,063,094  
 
                        
Net interest income
     10,187,635       9,796,749       31,216,447       28,088,856  
Provision for possible loan losses
     17,203,000       11,450,000       34,523,000       27,700,000  
 
                        
Net interest income (loss) after provision for possible loan losses
     (7,015,365 )     (1,653,251 )     (3,306,553 )     388,856  
 
                        
Noninterest income:
                                
Service charges on deposit accounts
     224,675       265,069       684,986       713,587  
Net gains on sales of debt securities
     21,750       807,172       287,509       806,931  
Other noninterest income
     875,073       441,357       1,589,178       1,191,369  
 
                        
Total noninterest income
     1,121,498       1,513,598       2,561,673       2,711,887  
 
                        
Noninterest expense:
                                
Other-than-temporary impairment losses on available-for-sale securities:
                                
Total other-than-temporary impairment losses
     1,426,972       924,671       1,484,789       1,070,748  
Portion of other-than-temporary losses recognized in other comprehensive income
     (1,134,894 )     (750,827 )     (1,134,493 )     (750,827 )
 
                        
Net impairment loss realized
     292,479       173,844       350,296       319,921  
Salaries and employee benefits
     3,470,862       3,319,920       9,959,814       10,635,621  
Other real estate owned expense
     2,080,870       2,066,751       4,676,698       3,828,915  
Occupancy and equipment expense
     1,106,521       1,119,182       3,267,752       3,331,499  
FDIC assessment
     678,707       675,279       2,217,622       2,336,261  
Data processing
     437,829       505,299       1,247,409       1,499,653  
Advertising
     13,345       25,528       49,096       201,030  
Amortization of intangible assets
     4,072       4,072       12,216       12,216  
Other noninterest expenses
     835,263       836,886       2,457,485       2,500,838  
 
                        
Total noninterest expense
     8,919,948       8,726,761       24,238,388       24,665,954  
 
                        
Loss before applicable income taxes
     (14,813,815 )     (8,866,414 )     (24,983,268 )     (21,565,211 )
Applicable income tax benefit
     (5,960,479 )     (3,091,023 )     (10,127,972 )     (7,507,800 )
 
                        
Net loss
   $ (8,853,336 )     (5,775,391 )     (14,855,296 )     (14,057,411 )
 
                        
Net loss
   $ (8,853,336 )     (5,775,391 )     (14,855,296 )     (14,057,411 )
Preferred stock dividends
     (553,879 )     (545,000 )     (1,654,022 )     (1,102,111 )
 
                        
Net loss available to common shareholders
   $ (9,407,215 )     (6,320,391 )     (16,509,318 )     (15,159,522 )
 
                        
Per share amounts:
                                
Basic loss per share
   $ (0.42 )     (0.30 )     (0.77 )     (0.73 )
Basic weighted average shares outstanding
     22,569,372       20,918,020       21,593,589       20,840,691  
Diluted loss per share
   $ (0.42 )     (0.30 )     (0.77 )     (0.73 )
Diluted weighted average shares outstanding
     22,569,372       20,918,020       21,593,589       20,862,858  
See accompanying notes to interim condensed consolidated financial statements.

 

 

Exhibit 7.3
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 2010 and 2009
(unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Interest income:
                                
Interest and fees on loans
   $ 14,671,909       16,998,726       30,123,935       34,669,969  
Interest on debt securities:
                                
Taxable
     1,673,943       1,961,004       3,507,293       3,916,989  
Exempt from Federal income taxes
     294,650       310,178       600,912       650,231  
Interest on short-term investments
     15,988       5,758       32,543       22,721  
 
                        
Total interest income
     16,656,490       19,275,666       34,264,683       39,259,910  
 
                        
Interest expense:
                                
Interest on deposits
     5,464,530       8,699,655       11,255,119       18,182,631  
Interest on short-term borrowings
     26,333       47,251       56,752       307,539  
Interest on long-term Federal Home Loan Bank borrowings
     955,082       1,245,663       1,924,001       2,477,633  
 
                        
Total interest expense
     6,445,945       9,992,569       13,235,872       20,967,803  
 
                        
Net interest income
     10,210,545       9,283,097       21,028,811       18,292,107  
Provision for possible loan losses
     9,628,000       14,000,000       17,320,000       16,250,000  
 
                        
Net interest income after provision for for possible loan losses
     582,545       (4,716,903 )     3,708,811       2,042,107  
 
                        
Noninterest income:
                                
Service charges on deposit accounts
     235,836       240,879       460,312       448,517  
Net gains (losses) on sales of debt securities
     201,069       (241 )     265,760       (241 )
Other noninterest income
     348,689       422,880       714,104       750,012  
 
                        
Total noninterest income
     785,594       663,518       1,440,176       1,198,288  
 
                        
Noninterest expense:
                                
Other-than-temporary impairment losses on available-for-sale securities:
                                
Total other-than-temporary impairment losses
     666,759       1,040,871       666,759       1,040,871  
Less portion of other-than-temporary impairment losses recognized in other comprehensive income
     (608,942 )     (894,793 )     (608,942 )     (894,793 )
 
                        
Net impairment loss realized
     57,817       146,078       57,817       146,078  
Salaries and employee benefits
     3,223,969       3,435,246       6,488,951       7,315,701  
Other real estate expense
     1,222,042       1,452,500       2,595,829       1,762,163  
Occupancy and equipment expense
     1,074,211       1,086,386       2,161,230       2,212,318  
FDIC assessment
     754,397       1,157,449       1,538,915       1,660,982  
Data processing
     377,037       519,679       809,580       994,353  
Advertising
     16,859       28,192       35,751       175,502  
Amortization of intangible assets
     4,072       4,072       8,144       8,144  
Other noninterest expenses
     833,526       868,459       1,622,224       1,663,952  
 
                        
Total noninterest expense
     7,563,930       8,698,061       15,318,441       15,939,193  
 
                        
Loss before applicable income taxes
     (6,195,791 )     (12,751,446 )     (10,169,454 )     (12,698,798 )
Applicable income tax benefit
     (2,692,536 )     (4,378,551 )     (4,167,494 )     (4,416,777 )
 
                        
Net loss
   $ (3,503,255 )     (8,372,895 )     (6,001,960 )     (8,282,021 )
 
                        
Net loss
   $ (3,503,255 )     (8,372,895 )     (6,001,960 )     (8,282,021 )
Preferred stock dividends
     (551,251 )     (557,111 )     (1,100,142 )     (557,111 )
 
                        
Net loss available to common shareholders
   $ (4,054,506 )     (8,930,006 )     (7,102,102 )     (8,839,132 )
 
                        
Per share amounts:
                                
Basic loss per share
   $ (0.19 )     (0.43 )     (0.34 )     (0.43 )
Basic weighted average shares outstanding
     21,221,753       20,855,898       21,097,611       20,801,385  
Diluted loss per share
   $ (0.19 )     (0.43 )     (0.34 )     (0.42 )
Diluted weighted average shares outstanding
     21,221,753       20,859,102       21,097,611       20,839,274  
See accompanying notes to interim condensed consolidated financial statements.

 

Exhibit 7.4
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Operations
Three Months Ended March 31, 2010 and 2009
                 
    2010     2009  
Interest income:
                
Interest and fees on loans
   $ 15,452,027       17,671,243  
Interest on debt securities:
                
Taxable
     1,833,350       1,955,985  
Exempt from Federal income taxes
     306,262       340,054  
Interest on short-term investments
     16,555       16,963  
 
            
Total interest income
     17,608,194       19,984,245  
 
            
Interest expense:
                
Interest on deposits
     5,790,589       9,482,976  
Interest on short-term borrowings
     30,419       260,288  
Interest on long-term Federal Home Loan Bank borrowings
     968,919       1,231,970  
 
            
Total interest expense
     6,789,927       10,975,234  
 
            
Net interest income
     10,818,267       9,009,011  
Provision for possible loan losses
     7,692,000       2,250,000  
 
            
Net interest income after provision for possible loan losses
     3,126,267       6,759,011  
 
            
Noninterest income:
                
Service charges on deposit accounts
     224,476       207,638  
Net gains on sale of debt securities
     64,691       —  
Other noninterest income
     365,415       327,131  
 
            
Total noninterest income
     654,582       534,769  
 
            
Noninterest expense:
                
Salaries and employee benefits
     3,264,982       3,880,456  
Occupancy and equipment expense
     1,087,020       1,125,932  
Other real estate expense
     1,373,787       309,663  
FDIC assessments
     784,518       503,533  
Data processing
     432,543       474,674  
Amortization of intangible assets
     4,072       4,072  
Other noninterest expenses
     807,590       942,802  
 
            
Total noninterest expense
     7,754,512       7,241,132  
 
            
Income (loss) before applicable income taxes
     (3,973,663 )     52,648  
Applicable income tax benefit
     (1,474,958 )     (38,226 )
 
            
Net income (loss)
   $ (2,498,705 )     90,874  
 
            
Net income (loss)
   $ (2,498,705 )     90,874  
Preferred stock dividends
     (548,891 )     —  
 
            
Net income (loss) available to common shareholders
     (3,047,596 )     90,874  
 
            
Per share amounts:
                
Basic earnings (loss) per share
   $ (0.15 )     < 0.01  
Basic weighted average shares outstanding
     20,972,091       20,746,267  
Diluted earnings (loss) per share
   $ (0.15 )     <0.01  
Diluted weighted average shares outstanding
     20,972,091       20,818,840  
 
            
See accompanying notes to interim condensed consolidated financial statements and accountants’ review report.

 

Exhibit 7.5
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2009 and 2008
(unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Interest income:
                                
Interest and fees on loans
   $ 16,705,289       18,669,323       51,375,259       51,484,539  
Interest on debt and equity securities:
                                
Taxable
     1,909,531       1,636,351       5,873,340       4,806,351  
Exempt from Federal income taxes
     312,195       387,887       962,426       1,176,754  
Interest on short-term investments
     7,076       51,471       29,817       162,797  
 
                        
Total interest income
     18,934,091       20,745,032       58,240,842       57,630,441  
 
                        
Interest expense:
                                
Interest on deposits
     7,835,261       8,662,923       26,017,912       25,694,396  
Interest on short-term borrowings
     22,734       571,906       330,272       1,680,996  
Interest on long term Federal Home Loan Bank borrowings
     1,237,276       1,375,939       3,714,910       3,463,592  
 
                        
Total interest expense
     9,095,271       10,610,768       30,063,094       30,838,984  
 
                        
Net interest income
     9,838,820       10,134,264       28,177,748       26,791,457  
Provision for possible loan losses
     11,450,000       1,800,000       27,700,000       8,539,000  
 
                        
Net interest income (loss) after provision for possible loan losses
     (1,611,180 )     8,334,264       477,748       18,252,457  
 
                        
Noninterest income:
                                
Service charges on deposit accounts
     265,069       209,682       713,587       582,678  
Net gains on sales of debt and equity securities
     807,172       117       806,931       312,250  
Other noninterest income
     399,286       374,521       1,102,477       1,095,250  
 
                        
Total noninterest income
     1,471,527       584,320       2,622,995       1,990,178  
 
                        
Noninterest expense:
                                
Other-than-temporary impairment losses on available-for-sale securities:
                                
Total other-than-temporary impairment losses
     924,671       —       1,070,748       —  
Less portion of other-than-temporary impairment losses recognized in other comprehensive income
     (750,827 )     —       (750,827 )     —  
 
                        
Net impairment loss realized
     173,844       —       319,921       —  
Salaries and employee benefits
     3,319,920       4,219,635       10,635,621       12,628,179  
Occupancy and equipment expense
     1,119,182       1,212,522       3,331,499       3,375,614  
Other real estate owned expense
     2,066,751       409,275       3,828,915       884,578  
FDIC assessment
     675,279       291,821       2,336,261       668,888  
Data processing
     505,299       473,512       1,499,653       1,359,070  
Advertising
     25,528       289,770       201,030       791,351  
Amortization of intangible assets
     4,072       4,072       12,216       12,216  
Other noninterest expenses
     836,886       900,264       2,500,838       2,930,990  
 
                        
Total noninterest expense
     8,726,761       7,800,871       24,665,954       22,650,886  
 
                        
Loss before applicable income taxes
     (8,866,414 )     1,117,713       (21,565,211 )     (2,408,251 )
Applicable income tax benefit
     (3,091,023 )     266,621       (7,507,800 )     (1,198,888 )
 
                        
Net income (loss)
   $ (5,775,391 )     851,092       (14,057,411 )     (1,209,363 )
 
                        
Net income (loss)
   $ (5,775,391 )     851,092       (14,057,411 )     (1,209,363 )
 
                              
Preferred stock dividends
     (545,000 )     —       (1,102,111 )     —  
 
                        
Net income (loss) available to common shareholders
   $ (6,320,391 )     851,092       (15,159,522 )     (1,209,363 )
 
                        
Per share amounts:
                                
Basic earnings (loss) per share
   $ (0.30 )     0.04       (0.73 )     (0.06 )
Basic weighted average shares outstanding
     20,918,020       20,687,321       20,840,691       20,656,388  
Diluted earnings (loss) per share
   $ (0.30 )     0.04       (0.73 )     (0.06 )
Diluted weighted average shares outstanding
     20,918,020       20,920,384       20,862,858       21,048,143  
See accompanying notes to interim condensed consolidated financial statements.